1. The following problem refers to material in Appendix 25A.

The following information is available on a three-year swap contract. Oneyear maturity zero-coupon discount yields are currently priced at par and pay a coupon rate of 5 percent. Two-year maturity zero-coupon discount yields are currently at a rate of 5.51 percent. Three-year maturity zerocoupon discount yields are currently 5.775 percent. The terms of a threeyear swap of $100 million notional value are 5.45 percent annual fixed-rate payments in exchange for floating-rate payments tied to the annual discount yield.

If an insurance company buys this swap, what can you conclude about the interest rate risk exposure of the company’s underlying cash position?